toward the end of the economic cycle?

Demand for oil varies with seasons and economic cycles, thus affecting the price of gasoline. It also determines the best season to fill up the gas tank…

After a brief history of the oil market and our analysis of oil supply, let’s continue our analysis of black gold and the economic cycle of oil today by zooming in on demand.

How is the demand for oil characterized?

We fill the car’s tank and our oil tank for more or less the same price. The same applies, although to a lesser extent, to the use of oil in the industrial sector.

According to economists, demand for oil is highly price inelastic. Indeed, the price of fuel for cars will have to increase greatly for drivers who can afford to replace public transport with cars.

Moreover, oil is not subject to a reserve requirement that smooths fluctuations in its price, as, for example, gold: States’ strategic reserves are relatively low.

For example, in the United States, which consumes about 20 million barrels per day in 2021, inventories recently fell below 40 days. However, even if these strategic reserves are restored to the level of 2010, they alone would not be enough to meet the country’s 80-day demand.

US strategic crude oil reserves (in millions of barrels)

The price of oil is also subject to seasonal changes.

When should you fill the oil tank?

In which month of the year do you think it is more profitable to stock up on gasoline or fuel oil? If you’re thinking ‘summer’ like I am, you’re totally wrong!

Indeed, it is not the use of oil derivatives for heating in winter that affects the demand, on the one hand, the fuels that come to fill the tanks of our various cars during the spring or summer holidays, and on the other hand, the increase in agricultural and logistics activities in the hottest half of the year in developed countries.

Brent and WTI oil prices averaged over the period 1983-2017 [NDLR : Le WTI désigne la référence américaine et le Brent la référence européenne et mondiale] As noted in a research paper published in 2018, March, April and August tend to record abnormally positive performance and October and November tend to record abnormally negative performance. Journal of International Studies.

This result can be checked, for example, on the site Seasonal charts During the years 1982-2012:

Therefore, in principle, it is more profitable to wait for October or November to fill up your gasoline and fuel reserves.

But this statistical generality sometimes runs up against the wall of empirical reality. On the one hand, the price of oil is at the mercy of geopolitical whims. But let’s not forget that there are risks in France as well, as we saw in October with strikes at TotalEnergies that caused supply problems and resulted in fuel shortages.

In short, combine this inelastic demand, which lacks high reserves and is quite seasonal, with supply at the mercy of political games, and you will understand better why it is very difficult to expect short- to medium-term fluctuations in the price of oil. .

In the long term, however, things are supposed to be different.

In the long term, oil prices are expected to be cyclical

The price of oil in principle periodic, for at least 2 reasons.

First, as Natixis noted in a September 26, 2022 note, “in the past, oil and natural gas prices have followed the global economic cycle by tracking global energy demand.” four graphs:

As Patrick Arthur points out:

“This response of energy prices to the economic cycle is stabilizing because inflation has fallen sharply in these economic slowdowns caused by monetary policy’s response to inflation. »

This explains why the price of oil has a weak or even negative correlation with sovereign bonds, because the “black gold” tends to rise when interest rates rise.

Oil prices (WTI) and US 10-year rates

The second reason, as Stöferle and Valek (S&V) mention in their report, “Raw materials extraction is an extremely cyclical activity characterized by a long investment cycle”. We Trust in Gold 2022.

This is a classic feature of subsoil industries, as I have already noted in relation to silver metal. How the two Austrians describe the working mechanism:

“Tough energy markets lead to higher prices and companies then earn above-average profits and attract capital from investors. The market rewards growth and encourages companies to use their new capital to drill new wells or develop new mines. Supply begins to increase and eventually exceeds demand.

The cycle reverses when resource prices fall, corporate profitability falls, stock prices fall and capital flees the sector. Over time, depletion occurs, supply inevitably diminishes, and the cycle repeats. Any violation of this carefully crafted cycle has consequences. »

It’s a point we’ll have occasion to return to when we talk to you about the energy transition.

Oil prices are therefore expected to be cyclical in the long run…but as we’ll see in a future post, this may soon no longer be the case!

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